In 2023, private equity firms faced significant challenges amidst a static market, soaring inflation, elevated interest rates, and slow deal activity. This confluence of factors resulted in an abundance of dry powder held by private equity firms. Such abundance, coupled with anticipated stabilization in the market and increased demand leaves experts anticipating increased M&A activity through 2024.

What is “dry powder” in private equity?

Dry powder refers to capital committed by private equity investors but has not yet been subject to a capital call for deployment in investments. In other words, it is raised capital that has yet to be invested. Private equity utilizes dry powder to buy out distressed companies, fuel growth of portfolio companies, solve liquidity issues, invest in promising opportunities, cover liabilities, or acquire other assets. Private equity firms with plentiful dry powder enjoy several advantages including flexibility in investing, the capacity to make strategic investments, and the agility to capitalize on emerging market opportunities.

Why do private equity firms possess so much dry powder right now?

Over the last decade, capital raise activities have swelled in private equity due to successful strategies from private equity firms and investor confidence in their strategies. The unprecedented levels of dry powder today stem from private equity firms continuing to follow the trend of increasingly raising capital. However, with slow dealmaking and limited opportunities, private equity firms have chosen to retain capital until a better market emerges. Hikes in interest rates and high inflation are some of the root causes behind why dealmaking has slowed so much, coupled with a mismatch of expectations between buyers and sellers with high valuations for the companies that are selling. Throughout 2023, these factors propelled dry powder levels to skyrocket to approximately $3 trillion dollars. Such surplus leaves private equity investors putting pressure on private equity firms to find deals to deploy their committed capital.

Private Equity Dry Powder Reaches Approximately $3 Trillion

What does this mean for the middle market?

With an abundance of dry powder waiting to be deployed and anticipated stabilization in debt costs, analysts anticipate that private equity firms will soon start deploying more if its dry powder. Experts anticipate deployment of dry powder especially in middle market acquisitions, thereby driving M&A activity over the year. Moreover, many predict that demand has and will continue to increase over 2024 compared to 2023. Pressure from investors on private equity firms to deploy capital has resulted in more acquisitions occurring in middle market companies. If you are a middle market business contemplating an exit, the opportunity to sell to private equity may soon materialize.

We’re here to help you. Should a private equity firm approach you regarding the sale of your business, feel free to reach out to discuss your options.